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04-01-2012, 10:37 AM #1
Sebi unveils norms to check systemic risk of algorithmic trading
Capital market regulator Sebi has put in place rules for the use of sophisticated automated software to prevent systemic risks caused by algorithmic trading used by brokers.
"Based on recommendations of technical advisory committee (TAC) and secondary market advisory committee (SMAC), it has been decided to put in place broad guidelines for algorithmic trading in the securities market,' the Securities and Exchange Board of India (Sebi) has said in a notification.
It said the adoption of technology for trading in financial instruments has been on the rise over the past few years. Stock brokers as well as their clients are now making increased use of algo trading.
Algorithmic trading refers to orders on bourses that are generated using high-frequency, automated execution logic.
The capital market regulator said exchanges should ensure that all algorithmic orders, software driven automated order execution engines, are routed through broker servers located in India and have appropriate risk-control mechanism emanating from algorithmic orders and trades.
"The minimum order-level risk controls should include a price and quantity limit check. The price quoted by the order shall not violate the price bands defined by the exchange for the security," Sebi said.
The system have emanated from such dysfunctional algos. Further, in exigency, the stock exchange should be in a position to shut down the broker's terminal, it said.
"Terminals of the stock broker that are disabled upon exhaustion of collaterals shall be enabled manually by the stock exchange in accordance with its risk management procedures," it added. .
The stock exchanges, Sebi said, may seek details of strategies used by algo traders for inquiry, surveillance, investigation and the like. The stock exchange shall also include a report on algorithmic trading on the stock exchange in the monthly development report.
"For securities that do not have price bands, dummy filters shall be brought into effective use to serve as an early warning system to detect sudden surge in prices," it said.
Sebi further said that stock exchanges shall subject the systems of the stock broker to initial conformance tests to ensure that the checks mentioned below are in place and that the stock broker's system facilitate orderly trading and integrity of the securities market.
"The quantity quoted in the order shall not violate the maximum permissible quantity per order as defined by the exchange for the security.
"The stock exchange shall suitably schedule such conformance tests and thereafter, convey the outcome of the test to the stock broker. For brokers already providing algo trading, the stock exchange should ensure the risk controls specified in this circular are implemented by the stock broker," Sebi added.